Expert Q&A: A Changing Landscape

Before the credit crunch, private equity firms were active investors in buying out retailers and real estate companies. That all came to an abrupt halt a year ago. Some of the previous buyouts have run into troubles since then because of high debt loads and struggles within the retail world. Chris Sciortino, director of Baird Investment Banking, talks about the future of private equity.

Retail Traffic:What is the market like now for private equity buyouts of retailers?

Chris Sciortino: The economic uncertainty has made the consumer outlook less clear. There was a surge in activity 18 to 20 months ago driven by the entities that had either lost their way or were moving sideways. The private equity community sees an environment like this as an opportunity to validate the quality of the retailer and views the better-executing retailers as long-term opportunities. The challenge taking a retailer private today, with the uncertainty in the financing markets, will effectively mean using more of your own capital.

RT:Are there any retailers whose real estate holdings would be attractive to a private equity investor?

Sciortino: That piece of the investment market has slowed. The real estate value is less of a driver today. That's not as aggressive as it was. We're going to see a continued shake-up in retail with more stores becoming available as a result of acquisitions and store closings.

Sciortino: I think everyone is very cautious about today's environment … but it also creates opportunities. For instance, there is an opportunity for the better-performing retailers that are undervalued or those that are poised for a turnaround.

RT:What, if any, upside is there in a market like this?

Sciortino: The true upside is those retailers who are executing well, blocking and tackling. The U.S. consumer truly loves to spend and this cycle will not go on forever. We have shifted focus to retailers in the early stages of growth. Investors are interested in those who can double or triple their growth.

RT:With what we know now about previous buyouts such as Mervyns, Linens ‘n Things and Toys ‘R’ Us, did private equity firms overextend themselves?

Sciortino: Absolutely. There was a fundamental trend of acquisition across all sectors including retail. We were in a market where private equity was very aggressive and this environment has shed light on that. There are situations where a significant amount of leverage was placed on some businesses.

RT:Do private equity buyouts benefit the retail industry?

Sciortino: Ownership changes, depending upon the retailer and the situation, bring a strategic opportunity to reinvigorate the retailer or change its operating model. Fundamentally, these investments are designed to make them better retail organizations and provide the best value for the consumer.

RT:Is there still a trend for private equity investors to take REITs private?

Sciortino: It's a dynamic time on all fronts. In this environment there will be a shakeout and those with strains will change the landscape creating even more opportunities.